National Reports

The drop in unemployment rate that was reported by the INDEC occurred because many people stopped looking for a job. This is the result of the loss of capacity to create new jobs due to the low economic growth and the poor quality of labor institutions. The problems is not solved by inducing employers and unions to set their wages below the inflation level or using public funds to subsidize inactivity- such as the Asignación Universal por Hijo and the Progresar- but by improving the design of labor market institutions.

The "model" implemented from 2003 relied on twin surpluses (fiscal and foreign). Since both were generated by the reduction of real wage, as a consequence of the strong currency devaluation, once real wages were restored to the pre-crisis level the economy stagnated. To reestablish the "model", it is necessary not only to devaluate but also to ensure that the wage increases are less than the devaluation of the dollar and inflation. Promoting public policies seeking a rise in productivity and competitiveness appears to be a more promising alternative in order to achieve growth without deteriorating real salaries.

Faced with the dollar instability, the authorities announced their intention to revise economic subsidies. Apart from being a delayed response, the initiative was put as a threat to those who seek to protect their savings by buying dollars instead of a fair and rational policy in the allocation of public funds. The general rule should be that tariffs are in line with the costs of public services. In parallel, it is needed to implement social tariffs so that poor households in the whole country (not just those living in Buenos Aires) will be the only ones receiving subsidies.

The Central Bank doubles 2001’s reserves in nominal terms, but once adjusted for price inflation in imports, they barely surpass the level they had when convertibility fell. The aggravating factor is that the import ratio (percentage of imports relative to the GDP) doubles the one that prevailed in 2001. This demonstrates that the currency crisis that Argentina is suffering now is severe, and demonstrates the need for a change in policy strategy.

Due to the persistent drainage of reserves, authorities announced a new exchange rate policy together with a new social program, called “Progresar” which intends to alleviate the marginalization suffered by millions of young people. Authorities are still unaware that exchange rate volatility is associated with excessive and badly managed public spending and that the only viable solution is a deep public sector transformation. Nevertheless, more alarming is the idea of inducing thousands of young people, in the beginning of their productive life, to become dependent on state paternalism.